Monitoring money market funds

The Investment Management Association (IMA) is planning to monitor the underlying holdings of funds within its Money Market sector, in order to meet new FSA and European requirements.

This follows a policy statement published by the FSA last month, confirming it was introducing the European Securities and Markets Authority guidelines on a common definition of money market funds.

The need to harmonise the definition of funds within this sector followed the global financial crisis in 2008.

Fund managers will now have until the end of the year to bring their own money market funds into line with these new rules and sector definitions.

Once this deadline has passed, the IMA will start to monitor the content of funds in this sector.

While money market funds are typically less risky than bond or equity funds, they do not represent an entirely ‘safe’ option for investors.

In addition to the risk of capital loss, there is a real chance in the current low interest and high inflation environment that the ‘real’ value of money invested in these funds can fall each year.

For this reason, money market funds tend to be only suitable for investors as a place to park cash for a very short period of time.

Another issue with money market funds, particularly when they are only capable of delivering low single digit returns, is the impact of charges. Many of these funds have typical annual management charges of 1.5% or higher, which can quickly erode the value of the fund.

It is good to hear that the IMA will be monitoring the content of money market funds from the start of next year. Investors should continue to carefully consider whether they are the best place for their cash.

Photo credit: Flickr/Images_of_Money